Despite changes to rich pension plans, public servants still overpaid: report

OTTAWA – Federal employees are still far ahead of their private sector counterparts in terms of total compensation thanks to their pension benefits, says a C.D. Howe Institute report issued Wednesday.

The paper, by pension expert Malcolm Hamilton, calculates that recent changes to public pension plans still haven’t gone far enough to even the playing field and that total compensation of government employees is about $4 billion higher than Ottawa calculates.

The report compares what is called “fair value” in compensation and finds that the guaranteed pension benefits paid out to retired public servants put them in a class of their own.

Last year, the government enacted changes to phase in increases to employee pension contributions so they equal to that of the employer — a so-called 50-50 cost sharing model— and raised the minimum retirement age for new employees.

“Bringing public sector pension contributions more in line with the private sector is the right thing to do,” Treasury Board President Tony Clement said at the time.

While public service unions railed against the changes, Hamilton says the changes hasn’t closed the gap — if anything, it has widened.

“Over 15 years they are going to push up the contribution rate by about five per cent of pay, but since they’ve started doing this the value of the pension benefit has gone up by 20 per cent of pay because of falling interest rates … so you figure out how fast we’re advancing,” Hamilton said.

Hamilton says the richer public service pensions could have been justified in the past by generally lower salaries, but comparison studies show that is no longer the case for the lower and middle ranks.

Those at the top, such as deputy ministers, still generally receive lower salary scales than industry managers but they are compensated by generous pension benefits.

“Steady pay increases (since 2006) and rising pension costs mean that federal employees are probably significantly overpaid by now,” Hamilton says.

“And while salaries for senior-level mandarins may still lag those in the private sector, they have some extraordinary pension benefits.”

Hamilton, a former partner of the Mercer pension consulting firm, says at the heart of the miscalculation is that the government essentially guarantees a 4.1 per cent real rate of return on retirement savings.

He says anyone in the private sector looking for such a guarantee in today’s low interest rate environment would likely get about one per cent.

The remedy, Hamilton says, is to lift the guarantee. A well-managed plan may indeed obtain a long-term four per cent rate of return, but taxpayers shouldn’t have to bear the burden if it doesn’t.

“They are being given something very valuable for free,” Hamilton said. “The way to fix it isn’t to gut the pension plan, the way to fix it is to move the risk to them (the employee plan) so they get the advantages of risk-taking as well as the burden.”

According to the report, total compensation to public employees is likely $4 billion annually greater than the $24 billion the government estimates, including $4 billion in pension contributions.